USD/CAD breaks out to 14-month high amid new US tariffs on Canadian lumber

Aside from the continuing market effects of the Macron rally on Tuesday in the aftermath of Sunday’s first round of the French presidential elections, currency markets have remained vulnerable to the Trump Administration’s every move. In the current case, the Canadian dollar plunged against the US dollar late on Monday and into Tuesday after new US tariffs of up to 24% were imposed on Canadian softwood lumber imports. This helped push USD/CAD up to and above the key 1.3600 level, establishing a new 14-month high in the process.

These US-imposed tariffs, spanning between 3%-24%, are meant to level the playing field for US lumber companies, but they were also imposed partly as a result of failed talks between the US and Canada on trade in dairy products. President Trump tweeted early on Tuesday, “Canada has made business for our dairy farmers in Wisconsin and other border states very difficult. We will not stand for this. Watch!”

What makes this move by the Trump Administration even more surprising is that Trump’s substantial rhetoric surrounding trade since he was a presidential candidate has revolved around trade renegotiations with and tariffs on products originating from Mexico and China. The fact that the administration has begun its trade actions with Canada does not bode well for US-Canada trade relations, and could potentially lead to a trade war.

For now, the move has prompted a sharp plunge in the Canadian dollar. Despite a generally weak US dollar on Tuesday, USD/CAD extended its surge to break out above major resistance around the 1.3600 level. For the past two weeks, the currency pair has been surging sharply higher as falling crude oil prices have weighed heavily on the Canadian dollar. From a longer-term perspective, USD/CAD has been entrenched in a general uptrend since mid-year last year. Tuesday’s breakout to a new 14-month high has hinted at a potential continuation of that uptrend. With further upside momentum for USD/CAD on continued CAD-weakness driven by weak oil prices and US-Canada trade conflicts, any continued move above 1.3600 could target the next key upside resistance level around 1.3800.

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